Pets are not cars: The perils of the lease-to-own pet business model

Is pet leasing a real business model? The short answer is that pet leasing is failing as a business model.

First, pets are not cars or any other kind of tangible collateral without some instinctive permanence for the lessor (i.e. the pet owner). Pets are not farm animals or domesticated livestock; they are family members meant for a lifetime of companionship and special moments shared together. Yet there have been and have been attempts to ignore the “family bond” created by pet ownership and to turn the process of acquiring pets into a neutral economic transaction. But could these types of transactions be a high-volume financed economic exchange that most of us are familiar with when we lease or buy another type of product on credit?

Second, leasing a product means that payments are made over time by the lessee for the exclusive use of the product. However, pet owners aren’t looking to buy a pet for a period of months or years and return the pet (or trade it in for a newer model) at the end of the lease term. They look forward to the years of being with their pet until death puts an end to the relationship. Similarly, pet store owners/sellers do not expect old pets at the end of the rental period. So the intent of the parties to a pet lease is basically a standing sale transaction, where the seller gets the proceeds (most likely settled with an outside company) and the buyer’s pet owner gets their pet for life. Essentially, the pet lease is what has been described by many courts as a purchase transaction in disguise.

Third, the pet leasing business model has some significant barriers to entry and financial constraints. For volume pet leases to work, the pet lessor needs a large capital base to have the product – pets – available to pet renters. In most cases, the individual pet stores or pet dealers will finance the purchase of the pet renter through a third-party finance company that will directly enter into the lease or assume an assignment of the pet lease in exchange for a discounted cash flow value of the contract. This is the business side of the model. The pet renter exits the transaction with their new, wonderful pet with little cost but months or years of future payments (not including the care, feeding, and medical expenses for their new pet). At the end of their payment term, the pet belongs to the renter free and credit-free. A number of states have passed legal prohibitions on pet leasing, which are effectively contracts of sale, i.e. a “de minimis residual financial value at the end of the term”. See Nev. Rev. Stat. 597,997 (the first state to ban pet leasing by law in 2017).

On the financing side, the company that manages the leases expects cash flow from pet tenants to cover their expected return on their capital investment. However, high costs of capital, high (or higher than expected) tenant default rates, or potential under-capitalization to continue to make new leases for survival can and have occurred. Ultimately, the finance company (which may also factor into its leases) collects the remaining payment streams on the pet leases, and the remaining uncollected lease payments can be a collections nightmare with multiple small claims against former pet tenants. Traditional replevin or return of the leased collateral — the pet — is not a realistic outcome. This leaves collection agencies the task of collecting from the pet renter, who can make multiple defenses as to why they shouldn’t pay, e.g. no more pet. Given the amounts involved, these would be claims filed in limited jurisdiction courts and follow-up actions if successful. So even if the process works as expected (and is legal in the state), pet leasing as a business model faces significant cash flow and management challenges to avoid failure.

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